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Is the Near-Trillion-Dollar Student Loan Bubble About to Pop?

Student loans have been going up since the recession began--and now defaults are up too. Something has to be done, but what?

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The Philadelphia Inquirer reported that New Jersey's state legislature has a bill under consideration that would ban state colleges from raising tuition more than 2 percent a year. Keeping tuition down is certainly part of the solution—tuition growing faster than wages is a recipe for defaults as students struggle to pay back their loans. In addition, just as housing prices going way up wound up pricing many people out of home-buying, increases in tuition will price students out of an education—particularly if the benefits of that education become less clear, as jobs remain hard to come by.

One university actually lowered its prices recently. The Inquirer reported that Sewanee, the University of the South, a private school in Tennessee, cut its annual cost 10 percent, from about $46,110 to $41,000--without closing programs or laying off staff:

“Enrollment was better than expected, alumni giving went up, and some parents donated the $5,000 price difference back to the university. The deficit turned out to be half of what was projected, at $1.5 million, and Sewanee got the bump in publicity it sought: Campus visits increased 60 percent.”

But what do we do for the people who've already finished college but are stuck without jobs and with mounting debts? RJ Eskow proposed a “Youth WPA,” imitating the Works Progress Administration from the New Deal to put young people to work rebuilding our infrastructure, developing new business ideas, make creative works that we can all enjoy, and more (his six-part proposal is worth reading in detail).

An idea that's been getting a lot of traction lately—including an online petition pushed by MoveOn member Robert Applebaum that has 320,000 signatures as of this writing—is student loan forgiveness as economic stimulus.

Rep. Hansen Clarke introduced a resolution in Congress, co-sponsored by 12 other members, that includes student loan forgiveness in its suggestions for bringing down the U.S.'s “true debt burden.”

In his Huffington Post blog, Clarke wrote:

"Congress is now completely focused on reducing debt. This would be a positive development, if not for one detail: it's focused on the wrong kind of debt.

With over a quarter of all American homeowners "underwater" -- owing more on their homes than their homes are worth -- and total student loans slated to exceed  $1 trillion this year, it is household debt, not government debt, that is constraining spending, undermining confidence, and precluding sustainable long-term growth.”

Clarke is right. For years, credit was a substitute for real wage growth in the U.S. And now as that debt burden has grown unsustainable, working families are barely able to keep up with payments, let alone spend enough to get the economy back on its feet. And student debt, as we've shown, is on the least sustainable trajectory of all.

Mychal Smith wrote:

“[C]onsider the potential impact on the economy if all of a sudden 35 million people were able to add to their monthly budget anywhere between $400 and $1000 that they no longer needed to satisfy exorbitant student loan repayments. And no longer faced with the threat of default(at a rate of 7 percent as of September 2010), credit scores would rise and more people with inclination toward starting small businesses (those things that every politician proclaims drive economic growth)[could do so]. Debt free degree holders would allow for more risk taking and innovation.”

Student debt forgiveness would put $400 a month back into Sternwood's pockets, $975 a month in Williams'. Even just forgiving the government loans would probably allow Parker to finish his degree instead of going to war.